Abercrombie CFO: ‘No One Really Can Predict’ Where Freight Rates Will Go
Freight rates have been on such a roller coaster ride since late 2023 that apparel retailers have to keep their heads on a swivel.
“No one really can predict where the freight rates are going to go,” said Scott Lipesky, chief financial officer of Abercrombie & Fitch, in second-quarter earnings call on Aug. 29.
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By all metrics, Abercrombie & Fitch had quite the successful quarter, with sales jumping 21 percent to $1.1 billion on net income of $250.5 million. The company also raised its sales and operating margin guidance for the second time this year, illustrating its ability to outperform expectations amid softer consumer spending.
But even as the retailer’s gross margins improved, the freight costs are continuing to hold it back. According to Lipesky and CEO Fran Horowitz, the expenses partially offset lower cotton costs and lower promotions on well-controlled inventories.
Abercrombie’s gross profit rate saw 2.4 percentage points of expansion to 64.9 percent compared to last year.
The freight pressures are expected to continue into the third quarter, Lipesky said, with gross profit rates expected to be “consistent with 2023” since the apparel seller has already passed the peak of the cotton price benefit.
When asked whether he thought freight rates would retreat further in the fourth quarter, Lipesky was unsure.
“They’ve been bouncing around a lot this summer. So for us, what we are doing is we are baking in elevated freight,” Lipesky said. “We assume that continues into and through the fourth quarter. We’ll talk about 2025, and we’ll obviously learn a lot more as we get through kind of the holiday peak of deliveries here in that September, October time frame and see what 2025 looks like. But at this point, we are baking in higher rates for Q3 and Q4.”
Even with the headwinds, the denim purveyor expects operating margin to be in the range of 14 percent to 15 percent, increasing the high end compared to the prior outlook of just 14 percent due to the lower cotton costs, lower clearance selling and higher average unit retail (AUR) prices.
Ocean freight rates spiked throughout much of the company’s second quarter, which began April 30 and ended Aug. 3. According to Drewry’s World Container Index (WCI), these rates increased 119 percent from April 25 to July 18, where 40-foot container prices peaked at $5,937.
On a year-over-year basis, those numbers saw an even more pronounced 286 percent gap from the $1,537 per container figure.
Since that peak, WCI figures have dipped nearly 13 percent to $5,181 per container as of Aug. 29.
Air freight rates have continued to escalate throughout 2024. While the worldwide rate was flat on a month-over-month basis as of July 24, the annual comparison numbers saw a 10 percent increase, according to data from WorldACD. Rates out of the Asia Pacific region jumped 20 percent, while Middle East and South Asia (MESA) saw USD/kg skyrocket 51 percent.
In the time since, worldwide rates on a two-week-over-two-week basis (comparing the weeks of Aug. 12-25 with the weeks of July 29 to Aug. 11) have increased another 1 percent. Asia Pacific and MESA prices both inched up 2 percent.
“You’ve seen the ocean rates spiking up,” Lipesky said. “That’s been well documented out in the market. And then we are also seeing the air rates spiking up a bit too.”
The CFO said freight entering the U.S. has “been a little busier than normal here in the summer season.”
Abercrombie competitor American Eagle Outfitters didn’t address the impact of freight costs in its own earnings, instead referring to the benefits from favorable materials costs as a tailwind to its own gross margin.
“There has been some freight disruption in the industry, but our teams have gotten ahead of that, really just changing timelines and handover dates,” said AEO chief financial officer Mike Mathias, possibly alluding to the ongoing diversions of ships away from the Red Sea and a possible East Coast port strike. “So we’ve mitigated any issues there with some of the recent disruption.”
AEO saw net income of $77.3 percent in its second quarter, with revenue jumping 8 percent to $1.3 billion. While the Aerie parent raised the low end of its operating income guidance for 2024, the company lowered the top end of expected revenues.